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Market Shares, Consumer Ignorance and the Reciprocal Termination Charges

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  • Yu-Shan Lo
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    Abstract

    The aim of this paper is to study different regulatory effects on termination charges and social welfare. We employ a framework with a fixed network and two mobile networks competing in a market to study the following regulatory regimes: collusive and social welfaremaximising reciprocity, uniform termination charge, asymmetric regulation, and direct calling price. We incorporate the idea of partial consumer ignorance when calling to a mobile user and allow the network operator to discriminate between on-net and off-net calls by setting differential calling prices. Compared to the uniform termination charge and asymmetric regulation, it is shown in this paper that the regulator can improve social welfare, without too much intervention, by imposing reciprocity on termination charges. We also find that with stronger consumer ignorance the regulator is more capable of improving social welfare. Further we show that, depending upon the extent of consumer ignorance, direct regulation of calling prices may be a welfare-improving alternative over regulation of termination charges.

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    Paper provided by Department of Economics, University of York in its series Discussion Papers with number 09/19.

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    Handle: RePEc:yor:yorken:09/19

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    Keywords: Telecommunications; Consumer ignorance; Termination Charges; Regulation;

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    1. Gabrielsen, Tommy Staahl & Vagstad, Steinar, 2008. "Why is on-net traffic cheaper than off-net traffic Access markup as a collusive device," European Economic Review, Elsevier, vol. 52(1), pages 99-115, January.
    2. Buehler, Stefan & Haucap, Justus, 2003. "Mobile Number Portability," Working Paper 17/2003, Helmut Schmidt University, Hamburg.
    3. Armstrong, Mark, 2001. "The theory of access pricing and interconnection," MPRA Paper 15608, University Library of Munich, Germany.
    4. Bijl, P.W.J. de & Peitz, M., 2004. "Dynamic Regulation and Entry in Telecommunications Markets: A Policy Framework," Discussion Paper 2004-010, Tilburg University, Tilburg Law and Economic Center.
    5. Tommaso Valletti & George Houpis, 2005. "Mobile Termination: What is the “Right” Charge?," Journal of Regulatory Economics, Springer, vol. 28(3), pages 235-258, November.
    6. Martin Peitz, 2005. "Asymmetric Regulation of Access and Price Discrimination in Telecommunications," Journal of Regulatory Economics, Springer, vol. 28(3), pages 327-343, November.
    7. Gans, J.S. & King, S.P., 2000. "Mobile Network Competition, Customer Ignorance and Fixed-to-Mobile Call Prices," Department of Economics - Working Papers Series 734, The University of Melbourne.
    8. Armstrong, Mark, 1998. "Network Interconnection in Telecommunications," Economic Journal, Royal Economic Society, vol. 108(448), pages 545-64, May.
    9. Ralf Dewenter & Justus Haucap, 2005. "The Effects of Regulating Mobile Termination Rates for Asymmetric Networks," European Journal of Law and Economics, Springer, vol. 20(2), pages 185-197, September.
    10. Peitz, Martin, 2005. "Asymmetric access price regulation in telecommunications markets," European Economic Review, Elsevier, vol. 49(2), pages 341-358, February.
    11. Michael Carter & Julian Wright, 1999. "Interconnection in Network Industries," Review of Industrial Organization, Springer, vol. 14(1), pages 1-25, February.
    12. Wright, Julian, 2002. "Access Pricing under Competition: An Application to Cellular Networks," Journal of Industrial Economics, Wiley Blackwell, vol. 50(3), pages 289-315, September.
    13. Nicholas Economides & Giuseppe Lopomo & Glenn Woroch, 1997. "Strategic Commitments and the Principle of Reciprocity in Interconnection Pricing," Industrial Organization 9701001, EconWPA.
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